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Presentation/PPT
27/08/2022
PwC Case Studies in Taxation, © 2013, PwC, LLP HAWAIIAN MEMORIES, INC.
Hawaiian Memories, Inc. (HMI) is a C corporation that was formed in 2007 in Maui. The
company markets specialty tourism products of the islands of Hawaii. The initial
incorporators were Angie Lee and Bob Lin, who now own 1,000 shares of voting
common stock and 100 shares of preferred stock each. The company has eight
employees who collectively own 500 shares of nonvoting stock. Most of the employees
have worked for the company for several years. They purchased the stock when the
company offered it at the end of each year. Two own 100 shares each; the other six own
50 shares each.
None of the shareholders are related to each other by blood or marriage, except for
Angie and Bob. All individual shareholders are native Hawaiians except for Inge; she is
Swedish and has lived on Maui and worked for HMI for three years. Inge plans to move
back to Sweden in one year and try to develop markets for HMI products there.
Another stockholder is the Plantation Sugar Partnership (PSP). PSP owns 500
nonvoting common shares; it supplies raw sugar in bulk to HMI. Bob Lin and his sister
Katie each own 50% of PSP.
The corporation uses a June 30 year end. The year was chosen arbitrarily. All of the
HMI shareholders use calendar years. Financial statements for the year ended June 30,
2012 are attached. HMI does not expect that it will generate any significant increases in
investment or passive activity income in the coming years.
This was the first year of corporate operating losses in some time. The corporation
elected not to carry back the losses because the tax rate paid in those years was lower
than they expect to pay in the future. Bob and Angie expect one or two more years of
losses and then steady increases in net income.
Bob lives in Hawaii and manages operations there. Angie moved to San Francisco in
2008 to develop mainland markets for their products. Both earn annual salaries of
$150,000. The shareholders and all employees are provided accident and health
insurance. The company contributes 10% of each employee’s salary to a defined
contribution pension plan each year.
PART I
On October 1, 2012, Bob and Angie came to your office for the first time. They have just
filed the corporate return for the fiscal year ended June 30, 2012 and are interested in
having you take over all the future tax work for the corporation. They inform you that
they have just read an article in Tourism Retailing about the tax and cash-flow benefits of
pass-through losses. They have filed an election to be an S corporation, effective on
July 1, 2012.
Bob and Angie signed the consent for the S election because they were the only
shareholders with voting stock. Their reasoning for making the S election is that they
expect losses for a year or two as they try to expand, and they would like to use the
losses already incurred as well as the prospective losses against their other income.
Review all relevant information and identify any issues related to conversion to S status.
Advise Bob and Angie about the conversion to S status. Page 1 of 4 PwC Case Studies in Taxation, © 2013, PwC, LLP HAWAIIAN MEMORIES, INC.
PART II
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